M&As to accelerate consolidation in China property sector

    Moody's Investors Service expects its rated property developers in China (Aa3 negative) will increasingly use mergers and acquisitions (M&As) to replenish their land banks, expand their geographical footprints and economies of scale, given the intense competition at public land auctions that resulted in a surge in land premiums in major cities.
  "Acquiring land through M&As could also accelerate project sales and cash flow generation if those acquired projects have already received the relevant approvals or are under development," said Kaven Tsang, a Moody's Vice President and Senior Credit Officer.
  "Notwithstanding these benefits, developers' leverage could increase if the M&A is funded by debt or the acquirer needs to take on a large amount of debt obligation from the acquired projects," Tsang added.
  In addition, Moody's noted that the reform of state-owned enterprises (SOE) also leads to more opportunities for M&As among SOEs and will accelerate industry consolidation.
  "The sale of property assets by non-property SOEs to large-scale property developers with state-owned backgrounds will further strengthen the latter's market leader position and increase their land banks," said Cindy Yang, a Moody's Analyst.
  Moody's conclusions were contained in the latest edition of its China Property Focus.
  According to the report, growth in nationwide home sales moderated in June and is expected to soften further to a single-digit percentage for the 12 months ending May 2017, down from 16.6% in 2015 and 30.3% for the 12 months ended June 2016.
  This expectation reflects a comparison against a high base recorded in 2H 2015 and in 1Q 2016 when stimulus measures spurred strong sales growth. Moody's expects limited benefits from these measures, while selective regulatory tightening in higher-tier cities will lead to lower demand for property in those areas.